Very difficult yes, but they also wrote a story specifically about it, so it's something they want to do. Not sure where you get "terrified" from.
The difficulty part, which is based upon things they have said before.
The half-elf is common throughout fantasy literature. That's reason enough to include it. The chance to build a raw generation tool to produce several generations of mixed species creature raws sure sounds like a fun challenge too.
The half-elf is also extremely easy to implement since elves and humans are at a physical level always depicted in fantasy as essentially identical. The problem as above mentioned is not when it is
dwarves+elves but when it is
dwarves+bizzare-tentacle-monster I just modded in. We want the former to be able to reproduce together, the latter we both do not want interbreeding but will be unable to actually make work anyway.
To be fair, by that same logic there was no reason to implement homosexuality, and yet Toady did it anyway.
Homosexuality exists in real-life and it's absence is more likely to cause controversy than it's presence in the present order of things. There is no real reason to add in cross-species romances before we add in the reproduction because the same basic criteria are involved there as in reproduction (creatures are more likely to be attracted to things they can reproduce with than things they cannot). It also messes up the game because of all the historical creatures forming sterile marriages reducing the birth rate in worlds where the ratio of sites to historical characters is high.